Surviving the Pitfalls of Running a Business

Businesses, especially start-ups and SMEs record very high insolvency rates with as many as 1 in 3 businesses failing in their first three years. Equifax has published statistics for the third quarter of 2011 on the number of business failures across the UK main regions. Business failures are said to have increased by more than 3% when compared to last year and the rates are rising significantly higher than the national average in some areas.

Public and private sector businesses play a vital role in powering the recovery so it is essential for businesses to grow progressively. This could be by acquiring the appropriate business finance. Two thirds of UK enterprises still anticipate business growth and this is because they address the common reasons behind business failure at their early stages. Below are 7 common reasons why a business fails and tips on how they could be avoided.

Lack of Planning

The business plan forms the foundation for every business irrespective of its size or longevity of service. Entrepreneurs need to adopt planning as the guide to growth as many SMEs fail due to shortcomings in their business plans. It should be realistic, precise and accurate and should be based on updated information and specialised forecasting. Remember the well-known slogan – “Failing to plan is preparing to fail”

An ideal business plan should be on paper but the content should incorporate the following;

Executive summary: The key points of the business plan. Similar to the content page found in any publication.

Description of the business: The services offered, including the management line-up, technology, operations and products.

Financial review: The state of the business’ finances, including the balance sheet, income statement, cash flow statement and revenue projection.

Industry review: A detailed analysis of the industry, its suppliers, its target market and potential competitors. Identify all of these key points and establish ways to stand out from competitors.

Business strategy: The approach to the future, including the growth plans.

Plan of action: Details of how you intend to implement your business plan and achieve your stated goals and objectives.

Poor management

Businesses could fail not because they are insolvent, but because the managerial board do not have intensive experience. This is often the case with new business owners who lack relevant management expertise. Managers need to go out of their way to truly understand their market sector and the demands of their customers. It is advisable to self-manage a business before opening it, especially if the business requires a lot of staffing. Most managers would opt for further education and training.

Lack of Finance

Insufficient capital prevents businesses from exploiting opportunities available such as supplier discounts. Operating cash is needed to keep a business going and sometimes, entrepreneurs have an inaccurate expectation of their sales revenue. Start-ups could take up to 3 years to generate positive revenue which explains why business owners have to allocate funds to finance the business throughout this initial stage

There are tactics businesses can adopt in order to stay in control of their finances. Lease costly assets such as equipment and building especially if you need them for a short period – saves you the cost of purchasing a full price asset. Get rid of any obsolete stock you don’t need as it appears on your balance sheet. If your business has outstanding debt owed by other businesses, an invoice finance facility could be a suitable refinancing tool.

Cash flow difficulties

Most businesses in their middle phases go into excessive borrowing in order to expand quickly which could result in high debt figures. Financing a new business composes of start-up finance as well as an ongoing flow of cash at the later stages as many entrepreneurs underestimate the amount of cash needed. The solution is to spend economically or pick out a business with very low start-up costs so that in a worst case scenario, your business would break-even. Facilities such as factoring could improve your cash flow significantly.

Tax Avoidance

Every business pays a certain proportion of its revenue in the form of corporate tax to the government. The same applies to employees who pay income tax against their respective salaries. There are other taxes involved such as sales tax (VAT) on commodities for businesses involved with sales. Evading these taxes could leave your business with huge annual tax bills and in a worst case scenario, your business risks facing legal action – this could probably be business closure. As an entrepreneur, always check the laws and set aside the required amounts to be paid as tax. Also, regularly update your licensing in order to be recognised as a registered business.

Poor Marketing

Established businesses are those that fully comprehend the demands of their customers and thrive to meet them. Conduct market research to find out information on the consumer taste and fashion, size of the market and the degree of competition. Also, if your business doesn’t have a website, then hire someone to setup a decent website. In the UK, approximately 80% of the population are internet users which demonstrate that your customer base could be boosted through online marketing. Embrace new technology and advertise your business through social media (Facebook, Twitter etc.). Other ways to generate revenue is to encourage ad-on sales and/or recommend substitutes. Remember, with efficient marketing you stand above your competitors.

Overexpansion

Businesses sometimes grow more than they project and it’s a leading cause of business failure. Entrepreneurs tend to expand their business once they experience revenue boosts. A good example of overexpansion is the case with RIM that suffered 3 days of internal connectivity problems because of the growing numbers of Blackberry users globally. It’s important for businesses to identify how and when to expand. If you can process your customers’ needs on time and maintain the existing production levels, then your business could expand. Note that expansion could mean hiring more staff.

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